How Much Money Can You Borrow To Buy Property With Your Self-Managed Super Fund (SMSF)?
Buying property using a Self-Managed Super Fund can be a great way to grow your real estate portfolio. Many investors are flocking towards SMFSs because of their low tax output.
What Are The Benefits Of Buying Property With A Self-Managed Super Fund?
If you are a professional earning a lot of money per year you are likely to be paying anywhere from 30-46.5% tax. That means that for every dollar you earn 30-46.5 cents is going to the government. However, in many super fund the tax that you pay is limited to 15% (or 15 cents on the dollar).
Because you are taxed less you can keep more of your profits and thus hopefully use those extra profits to grow your portfolio faster.
Also, once you hit the retirement threshold (the age is changing all the time, but I believe it is currently around 60-65) you can actually withdraw an income from your investments without paying any tax on that income.
The idea is that the government doesn’t want to be paying you a pension when you retire, so they encourage these lower tax brackets so that you can pay for your own retirement.
Can You Borrow Money Using A Self-Managed Super Fund?
Up until a couple of years ago a self-managed super fund was not able to borrow money to invest in property. This meant that if you wanted to buy a $300,000 house then you would have to have $300,000 in cash in your super.
However, one of the major benefits of property as an investment strategy is that you can leverage your investments and actually buy more expensive property than you could otherwise afford.
The short answer to the question is yes; there are ways that you can borrow money through your SMSF to purchase property
How Much Money Can My Self-Managed Super Fund Borrow To Buy Property?
The answer to this question will vary by the type of property you buy and by the lender you go with. The amount of money you can borrow is largely regulated by the lenders who are going to give you money.
Because you will likely be creating a loan where ONLY the property is held as collateral to the loan (and not any other part of your super fund or of your life) the lenders often see this as higher risk and thus will not be willing to lend you as much money.
It is common for you to only be able to borrow 65% of the purchase price using your super fund. Considering most people borrow 80-95% when purchasing a property in their own name 65% is a very low percentage.
Using the 65% example, if you wanted to buy a $300,000 house then you would have to provide $105,000 as the deposit (35% of the value) plus pay the stamp duty and legal fees associated with the property.
Lending will vary from bank to bank and in some cases you may have to provide more than a 35% deposit and it some cases it may be less. But this is a good benchmark to work off. Always speak to your accountant on financial planner for more accurate advice.
There are also some limitations on what you can use the property for because in almost all cases you cannot benefit from the property personally in any way. For example, if you are buying a holiday house you may not be able to stay in that holiday house for free as that is seen as a direct benefit to yourself.
Self-Managed Super Funds can provide property investors with a way to minimise the tax they pay on their real estate investments and thus grow their portfolio faster. But it is not without risks or downsides. Always seek professional advice before investing using this method.